Credit

December Financial Fitness Challenge--Catch the Refi Wave

by Susan Tiffany, CCUFC
/ December 7th, 2011

At the risk of sounding like a braggart, I'm more than tickled that I refinanced my mortgage a few months ago. I rolled together a mortgage, second mortgage, and a balance on a home equity line of credit and cut the combined monthly payment nearly in half, thanks to the much lower interest rates offered these days.
My plan is to maintain the same monthly payment as before. That way I can retire the whole loan in about six years, well short of the 10-year term. And my accelerated repayment will cut even more money off the total debt.

Come late to the party

I figured I was one of the last consumers to wake up and realize it was a smart time to revisit my home loan. But Consumer Reports says that about three of five (58%) homeowners with mortgages pay interest rates that are higher than today's bargain rates. Rates are near a 50-year bottom.
Here are some ways you might benefit from a lower mortgage rate:

• Reduce your monthly payment. Say you have a five-year old $200,000 loan with a 30-year term at 6.7%, and a monthly payment of about $1,300. Consumer Reports calculates that you could save $300 a month by refinancing the $188,000 balance into a 25-year loan at 4%—and save $90,000 in finance charges.
• Reduce your loan term. Another option is to go for a shorter loan term, say 15 years. At the even lower rate of 3.4%, your payments rise by a modest $30 each month, but you pay $149,000 less in interest over the life of the loan.
• Improve cash-flow flexibility. This is the path I took. I opted for a 10-year loan at an even lower interest rate but am voluntarily keeping my monthly payments as high as before, with the excess going straight to principal. I retain the flexibility to drop my payments to about half as much each month if I decide to divert that excess into savings, my 401(k)—or even into a trip to the Super Bowl.

If your savings goals are suffering because of your mortgage, refinancing can free up cash to address those needs.

That third point, flexibility, often gets overlooked. In fact, if any of your savings goals are suffering because you pay so much on your mortgage, refinancing can be a smart way to free up cash to address those needs.
You could decide to stay with a longer term loan and a corresponding lower monthly payment. If you think your job is vulnerable, for example, you would do better not to commit to a shorter term loan and a fixed, higher monthly payment. That way, you can always make extra payments to principal, which will shorten your loan repayment term and total interest paid while maintaining cash-flow flexibility.

Don't disqualify yourself

To be eligible for these low rates, you need regular income, a credit score of 740 or better, and equity in your house of 10% to 20%. That means you can't be underwater on your home loan—you can't owe more on your mortgage than the house is worth. And that's a sticking point, especially in markets where housing values have declined.
But don't just assume that you won't qualify. Talk to a loan officer and see what might work for you. If you can't refinance, maybe the credit union lender can suggest other strategies to help you free up cash and make better progress on your financial goals.
You also can play around with this calculator to see how different options play out for your circumstances.

Credit union car loan rates are about one and a half percentage points less than bank car loan rates.

Factor in the costs and understand that your real benefits come in the long haul, not the short term. If you expect you won't be in the house more than a few years, it might not make sense to refinance at all. Again, ask your credit union lender to help you run through the numbers to see if this move makes sense.

Look at car loan rates, too

While mortgages are getting most of the refinancing attention, don't overlook your car loan. Credit union new-car loan rates are averaging about one and a half percentage points less than bank new-car loan rates.
A colleague has a one-year old new-car loan and discovered that she and her husband can save about $30 a month if they refinance the $32,000 60-month loan, which they took out at 6.4%, to a 48-month loan on the $26,390 balance for 4%. Over the life of the loan, they'll save $1,380.
Not a bad return for maybe 30 to 60 minutes of effort. Once again, your credit union lender can walk you through the options and calculate the benefits.

Financial Fitness Challenge

The people at your credit union are serious about helping you achieve and maintain financial health. They bring you this website and other tools to help you make the most of your financial resources. The Financial Fitness Challenge continues to look at ways you can make better financial habits no matter what condition the economy is in.
Each month we randomly select five winners to receive $50 Visa gift cards; we choose each month's winners only from that month's entries, so enter often. Remember to register for the Financial Fitness Challenge.
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Susan Tiffany, CCUFCaskem@cuna.coop